The pair said they would set up a joint venture company that was 65% owned by Mitsubishi with the remaining 35% held by Hitachi, creating a combined firm with about 1.1 trillion yen (US$13 billion) in annual sales.

The merger would see the firms work together on a range of products including gas turbines for thermal power generation, environmental equipment and fuel cells.

The global market has continued to expand, driven by the growth engines of China and other emerging countries, the companies said.

"The combination of Hitachi and Mitsubishi Heavy's thermal power businesses... is the best mix in Japan in terms of technology and human resources to offer total solutions to clients," Hitachi President Hiroaki Nakanishi said.

"In the global market, our rivals are not in Japan but major foreign players," he said.

Hideaki Omiya, Mitsubishi Heavy's president, said demand for thermal-power generation was set to rise.

"This is an area in which many countries are pouring a lot of resources," he said.

The executives -- who dismissed speculation that the firms would eventually merge all their operations -- said the rise of engineering firms in China, India and other emerging countries is set to intensify global competition in the energy sector.

"Heightened environmental awareness around the world has presented a major opportunity for (Mitsubishi) and Hitachi to expand businesses where they both excel -- businesses that solve global energy and environmental issues at the same time," the firms said in a statement.

Mitsubishi Heavy produces a range of power plants, including thermal, wind and geothermal facilities. Its gas turbines for thermal plants rank among the most energy-efficient in the world.

Demand for natural gas-fired thermal plants has been surging in the wake of Japan's atomic crisis at the Fukushima Daiichi plant where reactors went into meltdown last year after being swamped by a quake-sparked tsunami.

Hitachi is a major player in steam turbines for coal-fired thermal plants, many of which are now planned for construction or are being built in emerging nations.

Last month, Hitachi announced it would buy British atomic power venture Horizon for about $1.12 billion to expand its nuclear business overseas, as Japanese remain wary about atomic power after the Fukushima disaster.

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